Stay Out of The Oil Patch Part 2 This Time It Ain’t Different

The U.S. stock market is showing signs of fatigue

iShares S&P/TSX Energy (XEG : TSX : $12.25), Net Change: -0.18, % Change: -1.45%
Canadian Natural Resources* (CNQ : TSX : $33.17), Net Change: -1.07, % Change: -3.13%
Suncor Energy* (SU : TSX : $32.13), Net Change: -0.43, % Change: -1.32%

Another week, another drop in the price of oil, oil sector stocks - As We Forecast , the C$ and Canadian equities.

The S&P/TSX lost another 5% last week and erased nearly all its gains for the year.

To make things worse, the U.S. stock market is showing signs of fatigue, and macro risk indicators that
s are all flashing red. With oil prices becoming a gauge of investors’ risk appetite, it seems that only a bottom in prices could halt the slide in global equities.

But with WTI breaking below the key resistance of US$60/bbl, investors are bracing for the worst. There are not many historical parallels of supply-driven oil shocks. Past periods of price weakness have been demand-driven. That said, the current experience shows :
similarities to the 1986 oil shock, when OPEC boosted production to gain market share. Last week, OPEC cut its 2015 customer
demand forecast by 300,000 barrels per day (b/d) to 28.9 million b/d – that’s the lowest level in 12 years. The downward
revision reflects the upward adjustment of non-OPEC supply as well as the downward revision in global demand. In 2015, nonOPEC
oil supply is forecast to grow at by 1.36 million barrels a day to 57.31 million a day. Growth is seen coming mainly from
the U.S., Canada, and Brazil, while declines are expected in Mexico, Russia, and Kazakhstan.

Separately on Friday:
International Energy Agency (IEA) released its oil market report for December. The IEA cut its outlook for 2015 global oil demand growth by 230,000 b/d to 900,000 b/d on lower expectations for Russia and other oil‐exporting countries.
This is the second consecutive year of growth below 1 million b/d. The IEA believes, “barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.” The IEA adds, “As for demand, oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy, but this time round their stimulus effect may be modest…The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt. Continued price declines would for some countries and companies make an already difficult situation even worse.”


Bankers Petroleum* (BNK : TSX : $2.59), Net Change: 0.09, % Change: 3.60%, Volume: 1,717,990
Bankers Petroleum has reduced its 2015 capital guidance to a maintenance level in order to average 21,000-22,000 b/d, in line with its 2014 average.

The company will spend approximately $218 million in 2015, which is within its cash flow and debt utilization means in a $60/bbl realized Brent price environment.

The company intends to reduce its rig count from six to three rigs by early 2015 but remains positioned to respond quickly when oil prices recover by potentially reinstating drilling rigs.

The three focus areas of the company will be: 1) execution of its horizontal drilling program;

2) acceleration of its secondary recovery program; and

3) targeting capital for operational improvements that will result in reduced costs (with projected cost savings of $2-3/bbl in the next two years).

The company remains well positioned for low commodity prices in 2015 with a reported September 30, 2014, cash balance of $88 million and only $104 million drawn on its $224 million line of credit. With the budget, Bankers continues a theme of fiscal responsibility, cash preservation and maintenance of 2014 production levels. In the interim, the company has the
ability to operate within its means while maintaining current production levels. Bankers plans to release its Q4/14 operational
update Tuesday, January 6, 2015.

the dramatic plunge in oil prices has made some shale projects unprofitable. Investors are waking up to the realization that not all shale oil is created equally.

Drilling for oil is extremely capital intensive. Companies often borrow money to fund the exploration and drilling. Now that oil is sitting at just $55, it’s likely to get much more difficult for shale players to get the financing they need after years of low interest and bond rates.

Investors are betting that at least some of these more speculative shale companies won’t survive if oil prices stay low for a prolonged period.

Don’t take our word for it. Just look at the junk bond market, which has been rattled by the energy turmoil. High-yield energy bonds have tumbled almost 10% this month alone, according to S&P Dow Jones Indices.

“It becomes a vicious spiral. If bonds stay where they are, it’s going to be very difficult for these companies to raise new capital to continue to live,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence.

high yield debt
High-yield U.S. corporate energy bonds have tumbled in recent weeks amid the oil price meltdown.

Cash flow negative: Huge energy companies like ExxonMobil (XOM) and Chevron (CVX)have plenty of financial flexibility to weather low oil prices, but that’s not the case for many smaller, highly-leveraged players.

Some of them are cash flow negative, meaning they aren’t generating enough revenue to offset the heavy investments they are making. Up until now, they’ve plugged those holes by selling stock or raising equity.

But $55 oil has changed that equation. Few investors are willing to provide affordable financing.

For example, the bonds of SandRidge Energy (SD), Midstates Petroleum (MPO) andResolute Energy (REN) are trading at distressed levels of just 50 cents or 60 cents on the dollar, according to FactSet.

“It’s hard to go from cash flow negative to cash flow positive on the turn of a dime when the commodity you’re selling falls by 45%,” said Cutter.


Defaults ahead:

The cash crunch is likely to be exacerbated by pressure from the banks, which may start reeling in credit revolvers currently cushioning shale companies’ balance sheets.

“Banks are not notoriously friendly in these down cycles. The lack of financing alternatives could speed up the demise” of some companies, said Tim Gramatovich, chief investment officer and co-founder of Peritus Asset Management.

Gramatovich predicted a “considerable” amount of defaults among high-yield energy bonds due to the looming cash crunch.

It is human nature to look for bargains - and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter at to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ EnergyI am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M


Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email OR  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

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Lor Loewen's photo.

Canada Heavy Oil Nearing $40 Threatens New Oil Sands Projects : Bloomberg

Canadian heavy crude fell to near $40 a barrel, threatening projects under construction as producers boosted output and space on a pipeline was rationed.

Imperial Oil Ltd. (IMO) is increasing output at its Kearl oil sands project to 110,000 barrels a day after a shutdown last month, Pius Rolheiser, a Calgary-based spokesman said by phone yesterday. Enbridge Inc. apportioned space on the Spearhead pipeline, which carries Canadian crude south to Cushing, Oklahoma, after demand to ship on the line exceeded capacity, according to a company statement.

Heavy West Canadian Select dropped $3.73, or 8.1 percent, to $42.19 a barrel yesterday, the lowest since April 2009, data compiled by Bloomberg showed. Crude has fallen into a bear market as U.S. output surges to the highest in more than three decades. Companies including Calgary-basedCanadian Natural Resources Inc. (CNQ) have said they may scale back investment plans if oil prices remain near current levels.

Any production that’s currently under construction is at risk, absolutely,” Dinara Millington, the vice president of research at Canadian Energy Research Institute in Calgary, said by phone. “Any production that’s currently existing can produce at $40 to $50.”

West Texas Intermediate futures added 20 cents to $61.14 a barrel at 4:04 p.m. Singapore time in electronic trading on the New York Mercantile Exchange. Yesterday the contract closed at the lowest level since July 2009.

Expensive Crude

WCS trades at a discount to WTI due to higher production costs and a shortage of pipelines to move supplies to refineries. Some of the oil from Alberta’s oil sands must be dug out of the ground and upgraded into a lighter synthetic crude before it can be processed by refineries, increasing costs.

The lowest-cost oil sands producers use steam to loosen and pull bitumen from the ground and extract the fuel for about $51 a barrel, a July report by the Canadian Energy Research Institute showed.

Last week, Baker Hughes Inc. reported Canadian drillers cut the number of rigs used to the least for this time of year since 2009 as margins were cut by the price fall.

The last time WCS traded below $50 a barrel was in December 2012.

“We saw prices a couple of years ago that were similar to this,” Jackie Forrest, a vice president at ARC Financial Corp. in Calgary, said by phone. “For existing operations, you need to cover your operating costs. We’re still above those thresholds.”

Bellatrix Exploration Ltd. BUY Target Price $14

BXE : TSX : C$6.88
Target: C$14.00

Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Bellatrix announced another Joint Venture transaction with its existing
partner Grafton for $250 million. We view the announcement positively
in the context that it 1) reconfirms BXE’s existing JV partner is content
with its partnership and looking to expand the relationship, 2) provides
additional promoted capital with which to anchor production and cash
flow growth in 2016 through 2018, and 3) although pro-rata terms were
similar to its prior JV transactions, the working interest reduction in this
deal provides higher working interest volumes (net to BXE) from this
future well stream, which we believe fits better into its future growth
and infrastructure plans. Our BUY recommendation and C$14.00 target
are unchanged based on 1.0x NAV 6.0x 2015E EV/DACF.
Investment highlights
Earn in terms similar to previous JV transaction with Grafton. The
announced before payout earn in terms of this transaction (50% to earn
33%) are essentially in line with its previous terms (82% to earn 54%).
Additionally, the overriding royalty option (10.67%) in relation to the
33% before payout is essentially the same as the 17.5% on 54%. On a
first-year basis, we see a ~34% capital efficiency improvement from its
wells using JV promoted capital.
Partner spend bolsters the long-term plan but no impact to our financial
forecasts. Given the capital is planned for 2016+, we have made no
adjustments to our estimates at this time. However, in our view, the JV
provides further promoted capital that should help bolster growth upon
expected completion of its Phase 1 and 2 gas plant projects.


Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its
peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Bellatrix Exploration Ltd Update BUY Target Price $ 14

BXE : TSX : C$7.55
Target: C$14.00

Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production

Investment recommendation
Bellatrix provided a brief operational update in which it highlighted two
unexpected plant turnarounds anticipated to impact corporate
production in late September. Although disappointing from a near-term
perspective; the continued effect from third-party facility impacts clearly
supports the company’s decision to construct its deep cut plant at Alder
Flats in 2015. We have revised our near-term production estimates
modestly to reflect the expected downtime in September and have taken
a slightly more cautious view in 2015. Given the reduced forecast, we
have modestly trimmed our target to C$14.00 and maintain a BUY
rating. Our fundamental view on the stock remains unchanged and with
a forecast 85% return to target, we see significant upside potential in the
stock. Our target price is based on 0.9x NAV and a 6.0x 2015E EV/DACF
Investment highlights
Q3/14 volumes slightly lower. BXE has guided towards a Q3/14 average
of ~40.5 mboe/d, versus previous expectations in the 41.5 mboe/d
range. Our revised forecasts capture this update and maintain an
outlook where BXE reaches 48,000 boe/d by year end, which is
contingent on tie-ins to third-party facilities expected in Nov/Dec.
Stock significantly oversold at current levels. Since May 7, the stock has
underperformed the Energy Index by ~36%, largely as a result of
temporary operational challenges. At current strip pricing and even
assuming a downside case where production volumes average 5% below
our forecasts, implied valuation remains extremely compelling at 4.4x.
Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Donnycreek Energy Inc. SPECULATIVE BUY

Target: C$4.00

Donnycreek is a junior pure play Montney exploration and
development company with assets in Alberta’s Deep
Basin. Donnycreek trades under the symbol “DCK” on the
TSX venture exchange.
All amounts in C$ unless otherwise noted.

Investment recommendation
Donnycreek released a brief operational update this morning on its
operations at Kakwa. The wells on the company’s three well Montney
pad (the company’s first 1.5 mile horizontals) have been successfully
completed and tested, however no test rates were provided with the
release. The company also announced a plant turn-around at Kakwa,
which will shut in production from the block for ~16 days in September,
and plans to expand the plant on the block from 15mmcf/d to 30
mmcf/d in the spring of 2015.
In our view, a fairly neutral release from the company; however, given
the delays in bringing on production at Kakwa, we have lowered our
production estimates for 2014 . Trading at just 3.1x 2015E
EV/DACF and 0.5x Base NAV (lowest NAV multiple in our coverage
universe), we continue to believe DCK is extremely undervalued relative
to its peers.
We continue to rate the stock a Speculative Buy, and look to November
for IP30 rates on the 3 recently completed 1.5 mile Hz’s (in addition to
the large production bump)as significant potential catalysts for the stock.
Highlights from the release
 Kakwa 3 well pad. DCK announced that all three 50% working
interest wells from the company’s first three well pads have been
completed and flow tested . These wells were drilled with
horizontal lengths of 1,900m, which is longer than wells previously
drilled on this acreage. The wells are expected to come on
production in October.
 Facility expansion. Donnycreek and its partners are currently
designing an expansion for its 16-7 facility to double the throughput
capacity to 30 mmcf/d of natural gas and associated liquids. DCK
and its partners plan to start-up the expansion by spring 2015.

Crew Energy Inc.

CR : TSX : C$9.66 BUY 
Target: C$15.00

Crew Energy is an intermediate oil and gas company with
a large portfolio of exploration and development
opportunities in western Canada. The company has a
two-pronged approach to corporate development,
supplementing organic growth with strategic acquisitions

Energy — Oil and Gas, Exploration and Production
Investment recommendation

Crew released second quarter results which generally met expectations
on production and cash flow. More importantly, its operational update
contained early stage but encouraging results from its first two
horizontal wells at Groundbirch, and with further expected news-flow in
H2/14 (Tower & Attachie results and potential A&D activity), we believe
the stock will continue to garner investor interest. We are maintaining
our BUY rating and C$15.00 target price based on an unchanged 1.0x
multiple to NAV and a 7.5x 2015E EV/DACF multiple.
Investment highlights
Q2 in line. Second quarter production averaged 27,200 boe/d in line
with CG/consensus of 27,198/26,637 boe/d. Operating CFPS of $0.39
met our $0.39 estimate and consensus of $0.40.
Early and encouraging Groundbirch results. Crew provided early stage
results from its two recently completed wells (still cleaning up).
Management indicated that the wells are flowing at 4.5 MMcf/d (after 10
days) and 3.5 MMcf/d (after 14 days) and are in the over-pressured
window of the Montney (1.3 to 1.4 times normal pressure). We believe
these results met management’s expectations.
Expressions of interest to purchase Princess have been received. Crew
has received expressions of interest for its Princess property but
cautioned a sale may or may not be consummated. Its commentary
suggested that the received offers would result in an after tax
(accounting) loss on the property of ~$200 to $250 million (based on
book value, which can’t be estimated from our perspective). We believe
a disposition of Princess in the $150 million range would be viewed
positively by the market.

Crew currently trades at a 0.7x multiple to CNAV, 5.3x EV/DACF
multiple, and $49,200/BOEPD based on our 2015 estimates, versus peer
group averages of 0.8x CNAV, 6.2x EV/DACF, and $78,200/BOEPD

Pengrowth Energy Corporation

PGF : TSX : C$6.82
Target: C$8.75

Pengrowth Energy Corporation is an intermediate, dividend paying
E&P focused in the Western Canadian Sedimentary Basin.
Pengrowth is listed on the TSX & NYSE under the symbols “PGF”
and “PGH” respectively.
All amounts in C$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Pengrowth released second-quarter results which solidly beat on
production and matched cash flow expectations. Key highlights of its
release include 1) the announced transportation services agreement
with Husky Energy to gain market access for its Lindbergh bitumen
volumes, 2) it has spent/committed 90% of costs on Phase I, 3) it
remains on time/budget at Lindbergh and 2014 guidance was reiterated,
and 4) results from its Cardium program continue to improve. We
continue to recommend the stock for an attractive dividend yield, solid
pilot results at Lindbergh, and a meaningful CFPS growth profile. Our
BUY rating and C$8.75 target price remain unchanged based 0.9x NAV
and a 2015E EV/DACF multiple of 8.2 times.
Investment highlights
Q2 in line. Production of 73,823 boe/d solidly beat CG/consensus of
71,735/72,236 boe/d. CFPS of $0.23 generally met our estimate of
$0.23 and consensus of $0.24. Full year 2014 guidance was maintained
except for a slight uptick in G&A expenses.
Securing market access. It announced a transportation services
agreement with Husky Energy (HSE:TSX, BUY rated covered by Phil
Skolnick) which accesses its Alberta Gathering System and includes a 10
year take-or-pay provision (with option for future growth at Lindbergh).
Pengrowth will develop a 15 km pipeline (and meter station) in Q2/15 to
facilitate the tie-in, the cost of which was included in its original budget
for Phase I. This agreement allows PGF numerous market access
options at Hardisty including rail and connectivity to export its bitumen
(WCS type pricing) along several key export pipelines.

Pengrowth currently trades at a 0.7x multiple to CNAV, 7.1x EV/DACF
multiple, and $75,100/BOEPD based on our 2015 estimates, versus peer
group averages of 0.8x CNAV, 6.2x EV/DACF, and $78,200/BOEPD.

Suncor Energy

SU : TSX : C$42.60
Target: C$50.00

Energy — Senior E&Ps/Integrateds
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

Target: C$2.25

Pine Cliff Energy Ltd. is a junior oil and gas producer
focused on dry natural gas, with assets in Alberta. Pine
Cliff trades on the TSX Venture under the symbol “PNE”.

All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We are initiating coverage of Pine Cliff Energy with a BUY rating and a
C$2.25 target price. PNE has had a great run over the last year,
increasing its share price by ~60%, but in our view, this is just the
beginning. Driven by accretive acquisitions and a rebounding gas price,
we expect this stock to go materially higher over the coming year, as
reflected in our forecast return of 58%. Our valuation is NAV based and
maps to a 2014E EV/DACF of 14.7x.
Why we believe this stock is set to outperform:
 Gas Leverage to the Extreme. Simply the best way to gain
exposure to rising gas prices, in our view, given a production
base that is 95% dry gas with no hedging in place. As
highlighted in Exhibits 1 and 2, PNE is the most levered
company to natural gas prices in our coverage universe, with a
$1 increase in AECO prices driving an increase to estimated
CFPS of ~40% and an increase to NAV of over 40%. In our view,
if you want to own gas, you want to own Pine Cliff.
 Acquisitions to drive performance. PNE has taken a contrarian
approach by purchasing dry gas while others chase oil and
NGLs. The last two significant acquisitions by the company over
the last year have resulted in share price bumps of 46% and
36%, respectively. PNE currently trades at 9.0x 2014E
EV/DACF, but as we walk through in Exhibit 3, if the company
were to buy $100 million in assets at 5x cash flow, this multiple
would be just 6.8x 2015E estimates. Use a 5$ AECO price and
it’s at just 5.4x.
 Our Call? Give this management team your money. George Fink
is well respected as an excellent steward of capital, and for
good reason. Early investors in Bonterra Energy (BNE: TSX: Not
Covered) have been handsomely rewarded over the last 16
years, with a CAGR of 45% since 1998. In addition to the energy
space, Mr. Fink has also had success in mining, where at
Comaplex Minerals he provided investors with a CAGR of 21%
over a 15 yeear period.
Our C$2.25 target price is based in part on our assumption that the
company will be successful in completing $150 million in acquisitions
over the next year and post transaction its multiple will return to the
natural gas peer group average of 9.0x EV/DACF

Peyto Exploration & Development Corp.

Personal note : my daughters went to college on the money I made tracking Peyto from $ 8 to $30


TSX : C$34.92 
HOLD  Target: C$39.00

 COMPANY DESCRIPTION: Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted

Oil and Gas, Exploration and Production GOING LONGER IN 2014 
Investment recommendation

Peyto announced fourth quarter results which were largely in line given pre- announced production and capital expenditures. Its infrastructure remains highly utilized and requires further expansions this year to accommodate growth; Peyto remains poised to do that given ~100 MMcf/d of capacity expansions planned this year. It has noticeably moved to longer lateral horizontals given licenses to date and we see the potential for a 10% improvement in IRR and capital efficiencies from ERH development. Peyto remains one of the highest quality natural gas producers in the Basin and a go-to name for exposure. We maintain our HOLD recommendation and C$39.00 target; however, we will continue to monitor the share price for any improvement in valuation (all other factor being equal).
Investment highlights Envision little change to 2014 budget despite firmer gas prices. Despite higher natural gas prices, we see a low probability of any meaningful increase to its $600 million budget given lead time and infrastructure planning. Additionally, PEY has hedged ~55% of 2014 production at ~C$3.70/Mcf, so it has a relatively modest upside participation.
Going longer in 2014.  Peyto has noticeably shifted its licensing and 2014 well program to extended reach horizontal (ERH) wells. Its average well length in 2013 increased by 7% or 100 meters YoY; we see the potential for a material increase in 2014. It is still early in terms of results and costs for Peyto-operated ERH wells; however, we believe ERH wells could provide a +10% improvement in capital efficiency and +10% uplift in IRR per well, which are not captured in current forecasts.
Valuation Peyto currently trades at a 1.1x multiple to CNAV, 11.3x EV/DACF multiple, and $83,400/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 8.1x EV/DACF, and $77,000/BO


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